Avoiding Momentum Crashes: Dynamic Momentum and Contrarian Trading

Victoria Dobrynskaya

No 9912063, Proceedings of International Academic Conferences from International Institute of Social and Economic Sciences

Abstract: High momentum returns cannot be explained by risk factors, but they are negatively skewed and subject to occasional severe crashes. I explore the timing of momentum crashes and show that momentum strategies tend to crash in 1-3 months after the local stock market plunge. Next, I propose a simple dynamic trading strategy which coincides with the standard momentum strategy in calm times, but switches to the opposite contrarian strategy after a market crash and keeps the contrarian position for three months, after which it reverts back to the momentum position. The dynamic momentum strategy turns all major momentum crashes into gains and yields an average return, which is about 1.5 times as high as the standard momentum return. The dynamic momentum returns are positively skewed and not exposed to risk factors, have high Sharpe ratio and alpha, persist in different time periods and geographical markets around the globe.

Keywords: momentum; contrarian; downside risk; crash risk; trading strategy (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2019-10
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Proceedings of the Proceedings of the 52nd International Academic Conference, Barcelona, Oct 2019, pages 102-135

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https://iises.net/proceedings/international-academ ... 99&iid=017&rid=12063 First version, 2019

Related works:
Journal Article: Avoiding momentum crashes: Dynamic momentum and contrarian trading (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:sek:iacpro:9912063

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